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Institutional relatedness behind product diversification and international diversification

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Abstract

Previous diversification research has largely focused on product relatedness, but ignored institutional relatedness—the degree of informal embeddedness with the dominant institutions that confer resources and legitimacy. We argue that during institutional transitions, political ties and international experience represent different types of institutional relatedness linking firms, respectively, to political institutions and market institutions. Specifically, CEOs’ political ties may help firms access critical resources, sense new market entry opportunities, and gain board support to increase firms’ product diversification. CEOs’ international experience may help firms leverage different market-based capabilities, engage in international competition, and then lead firms to grow on a different path by expanding internationally. We further investigate a crucial contingency factor: the degree of economic freedom. Data from 11,992 firm-year observations based on firms listed on China’s stock exchanges between 2001 and 2011 largely support our predictions.

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Notes

  1. For example, in 2012, Sanyi, the sixth-largest heavy equipment manufacturer in the world, moved its headquarters from Hunan (a province in central China) to Beijing. While Sanyi’s proclaimed goals were to access more resources for internationalization, this move can be viewed as an effort to enhance institutional relatedness. With more officials, ministries, and banks (most of which are state-owned) in Beijing, more political connections can be cultivated. With a large supply of executives with international experience—both Chinese and non-Chinese—Beijing features more talents who can help Sanyi expand overseas. Numerous other examples of institutional relatedness exist. For instance, in Mexico, Carlos Slim, a business magnate, has leveraged rich political connections to enter many regulated industries and build a conglomerate. One of his high-profile moves was to expand into the telecom industry by buying the state-owned Telmex in 1990. Moreover, such examples of institutional relatedness are not necessarily restricted to emerging economies. In developed economies such as the United States, in the last decade a leading private firm Koch Industries doubled its size by expanding into product-unrelated industries such as food, water, and personal technology. At the same time, the owners, Koch brothers, sponsored many conservative political organizations and helped spawn the Tea Party movement—clearly leveraging a dense network of political ties.

  2. We have tested the difference of the average degree of product diversification and international diversification among three groups: (a) CEOs with a central government background; (b) CEOs with a local government background; and (c) CEOs with a military background. We find that there is no significant difference in the average degree of product diversification and international diversification across these three types of political ties.

  3. In our sample, 59% of firms are SOEs. Among them, 78% are ultimately controlled by provincial governments.

  4. We further test the difference of the moderating effects of economic freedom on the relationships (1) between CEO political ties and product diversification and (2) between CEO international experience and product diversification. We find that two moderating effects are significantly different (χ 2 = 18.53, p < .01).

  5. We further test the difference of the moderating effects of economic freedom on the relationships (1) between CEO political ties and international diversification and (2) between CEO international experience and international diversification. We find that two moderating effects are significantly different (χ 2 = 27.89, p < .01).

  6. We use F-statistic in the first stage to test instrument strength and identify that instrument variables (the predicted values resulting from the regression on each variable, CEO political ties or CEO international experience, respectively) are strong (Semadeni et al., 2014).

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Acknowledgment

We thank Stephen Cheung, Greg Dess, Jane Lu (editor-in-chief), Livia Markoczy, and two reviewers for helpful comments. An earlier version was presented at the Southwest Academy of Management (Dallas, March 2010). This research was supported in part by the National Science Foundation of the United States (CAREER SES 0552089), the Jindal Chair at UT Dallas, and the Faculty Research Grant (FRG2/10-11/091) at Hong Kong Baptist University. All views are those of the authors and not necessarily those of the sponsors.

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  1. Henry W. Bloch School of Management, University of Kansas - Kansas City, 5110 Cherry Street, Kansas City, MO, 64110, USA

    Sunny Li Sun

  2. Jindal School of Management, University of Texas at Dallas, 800 West Campbell, SM 43, Richardson, TX, 75080, USA

    Mike W. Peng

  3. School of Business, Hong Kong Baptist University, Kowloon, Hong Kong

    Weiqiang Tan

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Sun, S.L., Peng, M.W. & Tan, W. Institutional relatedness behind product diversification and international diversification. Asia Pac J Manag 34, 339–366 (2017). https://doi.org/10.1007/s10490-016-9498-4

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